What are the most common types of exit strategies for bridging loans?

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Bridging finance

A bridging loan is the fastest way to ensure a loan comes through quickly for a particular transaction. The reason it’s called a ‘bridging’ loan is because it does exactly that – it bridges the gap between where you are and where you need to be if there is no other way to get there.

Sometimes it’s the only way. If you’re buying a particular property that doesn’t qualify for a traditional term loan, then bridging finance is a good alternative. Another reason sometimes bridging finance is a good idea is when for example a chain in the buying/selling process is stuck and the only way is to request a rapid bridging loan to move the process along faster.

And finally, a common example is if you’re buying a property at an auction house and you have just 28 days to complete the purchase, then a bridging facility is the best route to ensure you meet the deadline. This is because a term loan can usually take around 3 to 6 months hence the name ‘bridging’ loan because it’s the interim solution.

Never outstay your welcome

bridging loan exit strategies

When you enter a bridging finance deal with a lender, the number one thing to plan for is the exit strategy. A bridging loan is a short term finance arrangement with a bank or lender, that is usually in place for 6 to 12 months, with some very rare circumstances where the term might be extended to 18 months.

Outstaying your welcome with a lender when you’ve got a bridging loan with them is not advised – their deadline of usually 12 months is exactly that. The lender giving you a loan wants to get their money back out as soon as possible and that is why they have hefty penalties at the end of the deal if you do not come out in time. They put that in place because they want to ensure you’re just as motivated as them to get out of the deal.

Do not let this early warning put you off. Bridging loans have been a lifesaver for many deals and sometimes it’s the only way to complete a project or to ensure an investment goes ahead. But I wanted to give the early warning just how important exit strategies are which we will go into now.

Exit strategy number 1: Flip and Sell

The term flip and sell is used to describe someone who buys a property which is a bit run down, refurbishes it, and then sells on the open market for a profit. The ‘flip’ part is transforming it from an uninhabitable property to a goldmine. This is a very good way to buy cheap and sell for a profit.

However… if you’re investing in a property that looks like this…

 

 

You will struggle to find a lender who is happy to give you a mortgage on this type of security.

In this situation, you may benefit from applying for a refurbishment bridging loan that allows you to fix the property and then put it on the open market for sale.

 

Property development flip

 

Once you have finished with the ‘flip’ you can start to sell your property and the proceeds from the sale will be what you use to pay back the bridging lender. Any surplus, providing you have cleared any other fees and expenses, is yours to keep! This is your profit. You can use this to invest in the next project for example, or keep it as your hard earned money.

Quick tip: If you’re going to Flip and Sell, then you will need to provide the following very important information to the lender you’re borrowing money from: 1) Schedule of works to show how much the Flip is going to cost and exactly what works you will be carrying out. 2) As you’re planning to sell, you will need to demonstrate to the lender the projected value of the property. How much is it likely to sell for? For this, speaking with an estate agent or getting a professional valuation of the area is advisable.

Exit Strategy Number 2: Refinance

Let’s imagine in this example, you are looking to purchase a leasehold property and apply for a 25 year term mortgage. The mortgage application has been placed on hold because by the end of the mortgage term there will be less than 50 years remaining on the lease therefore the lender is now not willing to start the mortgage until the lease is extended.

You have the money for the deposit but you can’t buy the property cash, and you haven’t got the money to extend the lease. What do you do?

In this scenario, a bridging loan could come in handy. Before the term lender can start the mortgage, you could apply for a bridging loan in order to purchase the property ensuring you don’t lose it, and then use the money to also extend the lease of the property.

Now you can go back to the original lender for the term mortgage and restart the process. Once this mortgage comes through, then you can repay back the loan to the bridging lender.

Quick tip: If you’re using this exit strategy, then one of the most important documents the Bridging Lender will want to see is proof that you can exit the bridge and in this scenario it will need to be an Agreement In Principle from the lender you plan to get the long term mortgage from. Now you know the lender will be happy to give you the mortgage providing the lease is being extended which is what you will do with the bridge. If this requirement can be satisfied from day 1, then you are able to complete this transaction and get in and out of the bridge loan quickly.

Exit Strategy Number 3: Cash Redemption

This is very simple. If you have the cash to purchase an investment or to pay something off, then you should absolutely opt for that. However, if the money is stuck and not immediately available, then you can use a bridging loan in the interim until your cash becomes available.

 

Cash Redemption

 

In this scenario, you will need to demonstrate to the bank lending you the bridging loan where the cash is and how you plan to repay them. You will need to provide proof of income/cash that will be used to pay back the lender.

Different types of proof:

✅ Proceeds from another project/ deal
✅ Pension lump sum
✅ Inheritance
✅ Savings
✅ Dividends from the business
✅ Investment maturity

Exit Strategy Number 4: Development Approval

 

Development Approval

 

You are a professional developer with plenty of experience so you know when an opportunity is too good to miss. You want to purchase a residential property and convert it into multiple flats for resale purposes. However, the planning permission hasn’t come through yet so the development lender isn’t quite ready to approve the loan.

In the meantime, so that you don’t lose the amazing deal, you apply for a bridging loan whilst you wait for the development plans to be approved.

Once the plans have been approved, you can then go back to the original development lender and get the long term finance for the full project.

Quick tip: Some development lenders have their own bridging loans for these scenarios. Speak to us if you would like to find out more.

Exit Strategy Number 5 : Sale

 

Property Sale

 

Unlike a Flip and Sale, this is where perhaps you are currently in the process of buying another investment property and it’s a very popular listing. Lot’s of people are putting offers down and you’re worried you might lose this brilliant deal. You planned to use the proceeds for the other property you own which is currently selling on the market but it’s taking too long.

It won’t sell in time for you to buy this new property so you decide to use a bridging loan to buy the property. This guarantees the purchase. You are now the owner of this new house but you’re waiting for the other house to sell so that you can use the cash to pay out the bridging lender.

Quick tip: What the lender will be looking for here is evidence that the property you’re selling is on the market. Watch out: If your property has been on the market for a long time and it hasn’t sold, then the lender will start to question the ‘sale-ability’ of this house. They do not want to risk giving you the loan if you cannot prove you can give it back…with interest of course.

Surprise exit Strategy, Number 6: RE- BRIDGE of an existing bridging loan.

This is quite a taboo subject. In the event you can’t exit your bridging loan with the original exit strategy i.e. refinance or any other viable exit, you’ll find that a re-bridge may be offered.

If you really have not been able to exit on time the existing lender has the following options available:

1) Grant you an extension after assessing why the delay has occurred

2) Whack on the fees and charge you for every month you go over

3) Repossession

Other than option 1, none of the other options serve you. You don’t want to be in position 2 or 3, so what do you do?

If the exit strategy you originally planned and the back up plans included didn’t work out, then the 6th and final option is to go to another bridging lender and ask for a bridge to pay off the bridge.

That’s right. You will have another bridging loan to repay the first lender and this now buys you another 12 months to sort out the definitive exit.

Why is this a good option? It pays off the other lender who you have run out of time with meaning you can avoid their penalties.

Why is this not a good option? If you are on a bridge for longer than 12 months and the exit isn’t working, then you need to question the deal structure itself. The fees for bridging are high so you want to be able to find a way out of this deal as soon as possible.

Quick tip: Just because a re-bridge option exists, doesn’t mean you should plan for this as your back up plan. Not all lenders are happy to bridge a bridge. This is because they can see that you haven’t been able to get out of your bridging loan before so it makes them question if you’re going to be able to get out of theirs. Remember the lender is making a short term investment and wants to get back out as soon as possible. If you show up with an expired bridging loan that you can’t exit, be prepared to answer a lot of questions to help the lender get comfortable.

Before you go, we hope that we have made abundantly clear that it is vital you work out your exit strategy before applying for a bridging loan. Your trusted adviser should alway be able to best advise you and manage the application with the lender.

However, these top tips are not all the facts you need to know – each lender has their own criteria which would be impossible to sum up everything in this article. We suggest that before you apply for a bridge, please speak to us. We can help you assess the best rates on the market and the best plan to get in and out of the loan. Also we can help you with the ongoing refinance of the project, not just the bridging finance. We can help with: Commercial finance, Development Finance, Buy To Let, Equity release and Residential finance.

 

 


 

 

Your home is at risk if you fail to keep up payments on your mortgage or any other loans secured against it

Commercial lending and most buy to let arrangements are not regulated by the FCA

James Pedder, trading as Alfred James Financial Services, is an Appointed Representative

of New Leaf Distribution Ltd

which is authorised and regulated by the Financial Conduct Authority: FCA Number 460421

 

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